Midcap stocks are those which have a market capitalisation of between ₹5,000 crore and ₹20,000 crore while smallcap stocks have a market capitalisation of less than ₹5,000 crore. While they have great growth potential and lower valuation with regard to stock prices, they can also witness a drastic decline on small triggers.
So how to choose where to invest?
Volatility and risk
Midcap stocks are considered less volatile and riskier as compared to small-cap stocks. Small Caps are riskier since they are mostly very small firms that mostly go unnoticed till a big event or trigger. Also since stock prices are considerably lower in small caps any small fall that could have been absorbed by a bigger firm will do more damage to a smallcap stock.
Smallcap stocks have a higher growth potential since the risk is also higher. Since they have low stock prices, what would be a small bump in stock price for say a large-cap or midcap will be a surge for a smallcap stock which in turn will give better returns. However, one must be cautious while investing in such stocks and so do proper research and be ready for volatility.
The time frame for investing in midcap and smallcap stocks varies. While for midcaps, a 5-year time frame is considered appropriate to give the stock enough time to recover in case of a loss, it is higher for small caps which is around 7 years, since they are more volatile and may take longer to recover.
Lack of liquidity is a struggle for small caps. Midcaps are considered to have a better-managed liquidity position. Since small caps are traded in lesser and float lesser shares in the market, it might be difficult or take a longer time to find a buyer for a small-cap stock you want to sell at your desired price. It is comparatively easier for midcaps.
One must keep in mind all the factors before investing. Someone with a moderate risk appetite should opt for midcap stocks but must do a quality check beforehand while only a highly aggressive investor with a high-risk high reward attitude should invest in a smallcap stock.